Here’s How You Can Use Psychology to Save Money
Nobel Prize for Research on Retirement Savings?
This week, the Nobel Price in Economics was awarded to Richard Thaler from The University of Chicago for his work on how human behavior relates to economic events. His work has shown that people generally behave in irrational ways, disproving accepted economic theories.
His research has covered many economic topics, but one that stuck out to me in particular was his research on why people don’t save enough for retirement. Specifically how by setting certain parameters in place, people will begin saving money for retirement, and also they will save more money as time goes by. His two recommendations are as follows:
- All employees should be automatically signed up for a retirement savings plan, and then given the choice to opt-out if they choose. He found that most people will not opt-out.
- Then they should be signed up to automatically increase their savings percentage each time they get a raise in the future. And again, they can choose to opt-out if they like, though most people will not opt-out.
Dr. Thaler found that by automating the retirement savings process people will choose to stay in the program rather than opt-out by giving them a nudge. And he also found that when people are asked to increase their savings percentage in the present, they feel that they can’t afford it, but when asked if they want to increase their savings percentage in the future, they will choose that option.
So it is safe to say there is now scientific proof that it pays to automate your savings process.
You can read more on Dr. Thaler’s research here.